Option Investor
Newsletter

Daily Newsletter, Wednesday, 2/24/2016

Table of Contents

  1. Market Wrap
  2. New Plays
  3. In Play Updates and Reviews

Market Wrap

Reversals of Reversals In A Whippy Market

by Keene Little

Click here to email Keene Little
Both sides in the stock market are clearly battling it out for control and the result has been a large number of reversals and whippy price action. This is turning into a year of multiple >1% moves and that's very different from the past and the result has been a lot of frustration for traders.

Today's Market Stats

It used to be foreign exchange funds, depositories and foreign-related ETFs that experienced a lot of gaps from day to day but now it's common to see the morning move in the stock market start with a gap. Whether it's global trading and overseas markets' influence on overnight futures or all the algorithmic trading (HFTs), the net result has been big gap moves and many of those have been followed by a sideways market. Oftentimes if you weren't positioned for the gap there's been not much to trade. This morning started off with a big gap down and it was looking like we might go sideways again but then the buyers stepped in and drove the indexes back into the green. Will the rally hold into tomorrow morning? I'll be able to answer that question tomorrow morning.

Many of the algo trades are based on correlations, such as the between the S&P 500 and the US$/Yen currency pair. Lately we've seen a tight correlation between the S&P and oil and these correlations can create large moves in the market that are not necessarily related to anything that directly affects the stock market. But the program trading, which now accounts for about 80% of the market's trading volume, has a huge impact and these correlations must be considered (once they're identified), especially as the central bank policies start to have less of an impact on the market. I'll discuss these issues a little more with my discussion of currencies later.

So if you're feeling whipped by this market there's a reason for it -- you are. I have not personally verified this data but I read a market research report today from Phoenix Capital that talked about this year's price volatility. Apparently there were only 53 days between 1900 and 2000 that moved 1% or more. That's 53 days in 100 years. It's obviously been a bit more volatile than that since the bear market started in 2000 and now in 2016 the report said we had 22 such days through Monday. Add in yesterday's and today's moves and that makes 24 days out of 36 trading days this year that have seen moves of 1% or more. Just today we had a greater than 1% decline and then greater than 1% rally off the morning low. That means 67% of the days this year have seen a move equal to or greater than 1% and many times they've been reversal of prior moves or like today, reversals of intraday moves.

This is an amazing amount of price volatility while the VIX has stayed somewhat subdued (elevated in the 20s but not scary high) and to a large extent it shows how much this market is being moved by program trading. This likely means these large market moves are going to be more normal price behavior. The good news for active traders, if you can catch the reversals, is that this provides a very good trading environment to catch daily and intraday swings that are large enough to cover slippage in options plays. The bad news for traders, especially if you're not an active day trader, is that it's riskier holding positions overnight. A big gap move against you makes it much more difficult to exit a wrong-direction trade without taking a big haircut.

Part of the market's worry is earnings and whether or not the current P/E levels are warranted (no matter which way they're measured). Many traders are pleased that so many companies have met or exceeded analyst expectations, forgetting about the fact that earnings in general are in decline. Beating expectations is meaningless for bulls if earnings are in decline, which they are. Revenue growth has slowed, if not reversed, and that makes lofty P/Es difficult to justify. According to FactSet Earnings Insight, about 70% of the companies have beaten expectations, which keeps the bulls excited about buying the dip, but it's revenue earnings that can't be manipulated (as much) like earnings per share, especially with all the buy-back programs in existence (a pure waste of money for a company, except to reward management and shareholders).

In contrast to the 70% beat on expectations, about 76% of companies that have reported earnings have missed on revenue expectations. Of 85 companies that provided 1st quarter guidance only 17 said they foresee positive growth, leaving 68 saying they expected negative growth. The combined earnings growth for Q4 shows a 3.7% decline and if this figure holds true for the remainder of the reporting companies it will give us the 3rd consecutive quarter of decline in year-over-year earnings. This will be the first time this has happened since 2009. This is not something companies can massage away through their accounting gimmicks and it should be of great concern by the market. But hope is a wonderful thing, as long as it's not used as an investment strategy.

There's clearly a battle going on in the stock market as both sides argue their points and the price volatility is reflective of that. Let's see if there's any clarity from the charts


Review of the charts


S&P 500, SPX, and Value Line Geometric index, VALUG, Weekly chart

The weekly chart below shows the parallel up-channel for the 2009-2015 bull market rally, the bottom of which held as support last August-September but broke in January. The best SPX has been able to do so far is back-test the bottom of the channel and anytime I see this it's always a good setup to trade resistance. It might recover back into the up-channel but this kind of bearish setup works more often than not and since this is a game of probabilities, the higher-probability setup here is for the back-test to fail and SPX to continue lower. I've shown before the comparison with the Value Line Geometric index (VALUG in green) and how it's testing its May 2011 high. For SPX to do the same it will need to drop to 1370 (a 28% decline from the current level). There is no guarantee it will get down there but that's the current risk.


S&P 500, SPX, Daily chart

SPX broke its 20-dma at the morning low but the recovery and close above it, especially with a bullish hammer candlestick, looks like it could lead to another leg up for its rally off the February low. If that happens we could see a rally up to its 200-dma, currently at 2028 and coming down slowly. With the big whippy moves we've been seeing in the market it's very difficult to determine whether one day's move will see any follow through and it's no different here. Today's rally could be reversed and lead to at least a larger pullback before heading back up. Take nothing for granted in this market!

Key Levels for SPX:
- bullish above 1957
- bearish below 1810


S&P 500, SPX, 60-min chart

As of the end of today's trading it clearly looked bullish following the strong rally off this morning's low. But it also looked very bearish this morning so that left me thinking tomorrow's first move is a coin toss. On the 60-min chart below I show an expectation for another pullback before setting up a stronger rally to give us a 3-wave move up from February 11th. But in reality this is a read and react market right now, especially since we're in a corrective pattern. They're difficult to trade because there's often little follow through and that's been especially true in this market.


Dow Industrials, INDU, Daily chart

The Dow has the same pattern as SPX and you can see the strong bounce off its intraday test of the recovered 20-dma near 16231. If it can rally above its 50-dma, near 16590 on Thursday, which stopped the rally on Monday, it would be more bullish. In that case we could see a rally up to its 200-dma in the first week of March, currently at 17231. But there is a wave count that calls for another leg down for at least a test of the January-February lows and therefore today's strong recovery could be reversed just as quickly as this morning's decline was reversed.

Key Levels for DOW:
- bullish above 16,700
- bearish below 15,300


Nasdaq-100, NDX, Daily chart

NDX also recovered from an intraday break back below its 20-dma but almost left a bullish engulfing candlestick (if it had been able to close above yesterday's high). But it's still struggling with its two broken uptrend lines from March 2009 - August 2015 and June 2010 - November 2012, now near 4186 and 4222, resp., closing in the middle at 4200. Above Monday's high at 4235 would obviously be more bullish but then it would soon have to contend with its 50-dma, coming down but currently near 4296.

Key Levels for NDX:
- bullish above 4325
- bearish below 3900


Russell-2000, RUT, Daily chart

One thought about what might play out in the weeks ahead is shown on the RUT's chart below. It's just an idea but for a 4th wave sideways correction in the decline from its June high it would fit well. The reason I mention the sideways triangle is that it would be filled with whippy price action with lots of reversals. It could still head a little higher first, such as back up to its broken uptrend line from March 2009 - October 2011, now near 1043, and maybe even its 50-dma near 1050, but in a corrective pattern it's best to stay cautious rather than aggressive in either direction.

Key Levels for RUT:
- bullish above 1040
- bearish below 940


10-year Yield, TNX, Weekly chart

The Treasury market is not supporting the current bounce attempt by the stock market. Typically yields follow fairly closely with the stock market, which reflects the money rotating back and forth between stocks and bonds. As the stock market rallies, money comes out of bonds and that raises yields and vice versa. The bounce in the stock market off the February 11th low led to SPX making a new high on Monday above its February 1st high and today was a successful pullback to its recovered 20-dma, which held as support. By contrast, TNX made a much lower low in February vs. its January 20th low and it has not been able to even make it back up to its broken 20-dman, near 1.81%, which has acted as resistance twice since February 11th. In addition to that MA its' been struggling with its broken uptrend line from June 2012 - February 2015, near 1.76% (today's close was 1.745(%). As long as there is an underlying bid in bonds (holding yields down), there should be caution about stocks on the long side, especially if bonds are going to consolidate for several weeks (notice the similarity between the idea for a sideways triangle in the 4th wave position as mentioned for the RUT above).


KBW Bank index, BKX, Weekly chart

Another expectation for a larger correction/consolidation pattern is shown on the BKX weekly chart below. It could consolidate on top of its uptrend line from March 2009 - October 2011, currently near 58, for another month or two before heading lower (assuming we're in a bear market and not still in a bull market). The banks have been weaker than the broader market, which is reflecting concerns about the debt bomb that's out there. The collapse of the energy sector has spilled over into most other sectors and the explosion of debt in the past several years, thanks to the Fed's easy-money policies, is coming due. The financial system is at significant risk, especially considering all the 3rd party derivatives exposure, and it won't be just the banks that take it on the chin. Keep a close eye on the banks (follow the money).


Transportation Index, TRAN, Daily chart

The choppy climb up from its January 20th low has looked both bullish and bearish. There was a strong bullish divergence with its higher low on February 11th compared to the Dow. But the choppy climb has it looking more like a bear flag pattern than something more bullish. The rally into Monday's high, at 7463, was an intraday break above price-level resistance near 7453 (its August 2015 low) but it closed below 7453, as well as its 50% retracement of the leg down from November 20th. MACD and RSI are both rolling over from overbought, but without bearish divergence, so it could go either way from here but it's looking risky for longs. The Trannies have been a very good canary for the broader market.


Currencies

The US$ has been in a sideways trading range since March 2015 and one reason is likely because the relative strength of the U.S. economy draws money into this country. The Fed also helped strengthen the dollar with its talk for the past year about raising rates. But opposing those factors that strengthen the dollar are worries that the Fed will have to some things to devalue the dollar in order to make international companies' products more competitive (in the race for the bottom in devaluing currencies around the world). But are the central banks really in control of any of this? Many more analysts are now beginning to question that thesis.

Germany's central bank chief, Jens Weidmann, is now openly questioning the ECB's decision to go nuclear with their own NIRP. Weidmann is a member of the ECB's governing council and he said QE was "no longer necessary." Most members of the ECB appear to be behind doing more of "whatever it takes" but fractures in unified support are beginning to show up and a disagreement with powerhouse Germany is not to be taken lightly. France is lining up behind Germany to pull support for Mario Draghi so it's not just the countries' open borders that are beginning to crumble in the EU.


Nikkei 225 index, $NIKK, Weekly chart

Bank of Japan's Kuroda has been the central bank head since 2013 and he has been aggressively pushing QE, NIRP, ZIRP and anything else he can do to pump up the Nikkei (including outright purchases of stocks) and depressing the value of the Yen as a way of pumping up inflation and the stock market. It worked for a while as can be seen on the chart below. But since the middle of last year the NIKK has tumble hard while the Yen has been on the rise. The last few weeks have shown the currency and stock markets are losing faith in Kuroda's ability to do anything. After he announced NIRP last month the stock market rallied one day. That's it, one day.

The stock market continued its decline and the Yen continued to rise, in effect calling Kuroda's bluff as he promises to do "whatever" it takes (the statement by all central bankers now, who very likely feel trapped but don't know what else to try). As John Mauldin stated, "Japan is a bug in search of a windshield." And keep in mind that a rising Yen will cause a rush to exit stocks as algorithms hit the sell button (there's been a strong inverse correlation between the Yen and SPX and many trading algorithms trade based on this relationship, just as they are trading the oil correlation at the moment).


U.S. Dollar contract, DX, Weekly chart

Moving on to our Fed, they are in the process of preparing us for a few things:

1. Negative interest rates
2. A ban on cash (talk of removing the $100 bill, and 500 Euro bill from circulation)
3. More QE

The first two are tightly linked -- going to negative interest rates will only encourage people to withdraw their money and park it outside the banking system, even under their mattress. That would have a significant negative impact on banks' earnings as well as their capital base. One way to stop withdrawals is to go all digital and get rid of cash and that way the government/banks have a lock on your money and can institute tighter monetary controls at any time (ready for bail-ins?). France already bans any transactions over 1000 Euros with cash. Spain is looking into doing the same with 2500 as the limit and Germany is considering 5000. Basically NIRP can't work without a cash ban in place and we're being prepared for this by the likes of Larry Summers, et.al., as they use the excuse of criminal activity being supported by access to big bills (see Summer's article at Going After Big Money).


Gold continuous contract, GC, Weekly chart

With all of this information floating around about cash bans, NIRP, failing currencies and the potential for stoking inflation, it's no wonder gold has been rallying strong. I might not be convinced gold's breakout is real but I certainly can't argue with its recent strength. Gold is one of the best insurance programs to protect against a global currency crisis and failed central bank policies. Gold has broken out of a descending wedge that it's been in since 2013 and that has just about everyone I read turning super bullish on the shiny metal. At the moment I think it's a knee-jerk reaction, which will be followed by another leg down but I have to admit I'm not feeling comfortable with my bearish view on gold. I see the potential for another leg up to test its January 2015 high near 1308 but at the moment it's struggling to get above the top of a parallel down-channel for the decline since 2013. If gold can get above its February 11th high near 1264 there's one other resistance level to watch, near 1285, which is the 38% retracement of its 2001-2011 rally.


Oil continuous contract, CL, Daily chart

Along with the stock market, oil has been trading in a sideways range since its January 20th low and it could continue to do that for several more weeks before heading lower, even if it's to be just a minor new low or a test of the January-February lows. If it drops down to the bottom of a descending wedge pattern for the leg down from June 2015, we could see oil get closer to $20 before making a longer-term bottom. But if it rallies a little further then keep an eye on a downtrend line from June-October 2015, near 36.75, where a 3-wave bounce pattern off the January 20th low could finish and be followed by another leg down.


Economic reports

Other than New Home sales this morning there wasn't much in the way of economic reports to influence the market. Thursday morning will be a little busier with unemployment claims data, Durable Goods and house pricing data. Friday will be more related to what the Fed says they're watching -- GDP, personal income/spending and core PCE prices


Conclusion

The large number of large price swings is making it very difficult to figure out which way this market wants to go. Since the January lows we've seen some very strong moves and today's strong reversal off the morning gap down has it looking like it wants to break out to the upside. At the moment we remain inside a wide trading range between the January-February lows and the February 1st highs. Finger to the wind, it looks like we'll see the indexes make it higher but that could happen after another leg down to give us a larger pullback from Monday's highs.

Keep in mind that if we get a continuation of the rally that it will turn many, if not most, traders very bullish, especially with talk about the double bottom in January-February. But the larger risk is to the downside, especially with the confusion about what the central banks will or will not do and whether any of it really matters anyway. What should really matter is the fact that corporate earnings are in decline and that makes it more difficult to justify a renewed rally. A higher bounce maybe but not to new highs. There's not enough evidence to support new market highs from here, either from the economy or the charts.

One chart that I found from Arch Crawford, shown below, is very informative because it's hard to massage the numbers. It shows the decline in earnings by people and the tax revenue derived from it. They're both in decline and the 4-week average has dropped hard in the past month. An economy dependent on the mighty consumer is not looking so good and we're seeing the effects in the retail sector and the likes of Walmart. It's just another piece of the puzzle to help answer the question as to whether or not we're entering a recession and if so, it's not a time to be invested in the stock market. Trade it instead and keep the bulk of your money in cash equivalents (not money markets but instead in Treasuries). If you're not comfortable trading the short side (shorting stocks, buying puts, buying inverse ETFs), now is a great time to start learning and just start off small.

Good luck with your trading and keep it short-term oriented. I'll be back with you next Wednesday.

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying


New Plays

Moving Off Road

by Jim Brown

Click here to email Jim Brown
Editor's Note

We made the right decision on Tuesday not to add any new positions. The -266 point drop in the Dow and +319 point rebound could have been hazardous to new entries.

The rebound today suggests the worst is over and we are not going to retest the lows. There is no guarantee but today would have been a perfect opportunity for the bears to pile on and give us that downhill push.

The trailing stop losses on any long plays from the February drop were erased and portfolio managers with cash burning a hole in their pocket were given a buying opportunity.

I am only adding one long today with a high entry trigger just in case the market rolls over again. We should know relatively quickly if the resistance at 1,950 on the S&P is going to break or hold. That will give us the eventual market direction.

We only lost one position in the morning drop and that was GoPro and we exited with a gain.


NEW BULLISH Plays


ACAT - Arctic Cat - Company Profile

Arctic Cat makes snowmobiles, all terrain vehicles (ATVs) and recreational off-road vehicles (ROVs). They reported a bad quarter because of the exceptionally warm weather and lack of snow. Sales declined -14.3%. Of that 4.9% was due to the strong dollar. The brand is one of the most wildly recognized brands of off-road equipment.

Arctic Cat has been in a restructuring program for several quarters to revamp their dealer network, eliminate debt, reduce inventory and produce new cutting edge vehicles.

In Q4 they reduced long term debt by $15.8 million. They suspended the quarterly dividend to save $6.5 million in cash for the restructuring. Inventory decreased -$25 million sequentially. They generated approximately $27 million in free cash flow.

The company expects to see the benefits of their restructuring in the next two quarters with sales expected to rise +40% in the current quarter. New models and new products coming out this summer are expected to boost sales as well. They are announcing a new "single ski" snow bike at the snow dealer show in March.

While the outlook is far from exciting the company shares have rebounded from the low of $9 on January 28th to $16.45 today. The stock momentum is strong and it reached primary resistance at $16.50 this week. If the stock breaks through this resistance it could trigger additional short covering with the next resistance at $22.25. I am recommending a long position on a resistance break and an exit before we reach that higher resistance at $22.

Earnings are May 12th.

With an ACAT trade at $17.25

Buy ACAT shares, initial stop loss $15.00

Optional

Buy June $20 call, currently $1.40, stop loss $15.00




NEW BEARISH Plays


No New Bearish Plays





In Play Updates and Reviews

Back to Resistance

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow dropped sharply to 16,165 at the open but rebounded back to the resistance at 16,500 with a monster +319 point rebound to close at 16,484. The rebound should relieve some concerns that we are going to retest the 1,810 lows on the S&P from the 11th.

The S&P rebounded to 1,930 and resistance. The key 1,950 level is still the key resistance to watch and a break over that level should trigger some serious short covering and price chasing by portfolio managers. That is the equivalent of an all clear signal on the rebound.

We were only stopped out on one position on the dip and that was GoPro but we were still profitable.




Current Portfolio





Current Position Changes


LGF - Lions Gate Ent

The long position in LGF was triggered today at $21.25.


SGI - Silicon Graphics

The long position in SGI remains unopened.


DWRE - Demandware

The long position in DWRE remains unopened.


GPRO - GoPro

The long position in GPRO was stopped out.


Profit Targets

Check the graphic above for any profit stops in green. We need to always be prepared for a profit exit at resistance.


Stop Loss Updates

Check the graphic above for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.



BULLISH Play Updates


DWRE - Demandware - Company Profile

Comments:

DWRE rebounded from the open dip to $30.42 to close $2 higher at $32.57 and only a minor loss. There was no news so the decline was purely market related.

The position remains unopened until DWRE trades at $34.15.

Original Trade Description: February 22nd

Demandware provides enterprise-class cloud based digital commerce solutions in the U.S., Germany, UK, and internationally. The Demandware Commerce platform enables customers to establish complex digital e-commerce strategies including multi-brands, multi-site, omni-channel and in-store operations.

Everything is integrated including payment systems, email marketing, campaign management, personalization, taxation, ratings, reviews and social commerce.

Demandware shares were caught in the Tableau Software disaster on February 5th when Tableau warned they saw enterprise spending slowing. Shares crashed from $44 to $30 on the Tableau news.

Demandware reported earnings on the 9th of 38 cents that beat street estimates for 23 cents. Revenue of $75.6 million also beat estimates for $72.3 million. They guided for full year revenue in the $295-$305 million range. Shares dropped at the open the next day because the street was expecting $302.26 million. It was a very minor guidance blink but shares dropped $2 the next day. That was the low for the month.

Shares have rebounded from that $26.50 low to $33.50 because they are not Tableau Software. They did not report any weakness in their earnings and revenue but they were punished for the Tableau guidance prior to earnings.

I believe Demandware will return to the $44 level where the close before Tableau dumped on the cloud software sector.

The high today was $33.97. I am putting an entry trigger on this play of $34.15 to get us over that level just in case the market takes a turn for the worse. If we do get some broad based profit taking, I will modify this play to take advantage of any new dips.

Earnings May 5th.

With a DWRE trade at $34.15

Buy DWRE shares, initial stop loss $31.35

Optional

Buy April $35 call, currently $2.60, initial stop loss $28.75



GPRO - GoPro - Company Profile

Comments:

GoPro crashed at the open to stop us out at $11.77. Our stop loss was $11.85 but it gapped down to that level at the open. There was very little recovery so we did the right thing by exiting.

Original Trade Description: February 8th

GoPro is the number one action camera maker and created the current market. They moved from a simple camera maker to a content creator over the last couple years. At least that is what they wanted people to believe so that their sky high PE would be based on something other than simply a hardware company.

Fast forward to 2015 and 5-6 companies began to compete with action cameras of their own. GoPro's market share began to dwindle. A botched roll out of a new model in Q3 and two prices cuts in Q4 has knocked their share price down from $65 in August to $9 on Thursday.

One of the problems that GoPro has been unable to conquer is the relatively hard method to recover, edit and publish videos produced by the cameras. They have promised new software for a couple years and it never seems to arrive or fails to satisfy when the updates appear. This is a drag on future camera sales because you have to be a geek to produce any quality videos.

News broke today that GoPro had licensed its video technology, certain file storage and other system technologies. While the details are still unclear this could be a Hail Mary pass to Microsoft for help with their software problems. If it is not related to that then there is something else going on that could provide a boost for GoPro in the future.

Lastly, the drop in market cap from $8 billion to $1 billion makes them a very attractive acquisition target for somebody like Sony or even Under Armour. Microsoft could buy them with their pocket change.

Shares appear to have bottomed at $10 but just in case we can buy a March $10 put as protection for 97 cents. This means we have unlimited upside and almost zero downside risk. If somebody makes an offer for GoPro I would expect it to be $15 or more simply because the company is not in financial trouble. They currently has no debt and $474 million in cash. They just need to get over this technical problem and they will be fine.

Position 2/9/16

Closed 2/24/16: Long GPRO shares @ $10.65, exit $11.77, +$1.12 gain.

Closed 2/24/16: Long March $10 call @ $1.64, exit $1.89, +.25 gain.



LGF - Lions Gate Entertainment - Company Description

Comments:

I am really glad I did not cancel the LGF recommendation yesterday after three days of market chop. Shares soared +$1.73 today to trigger our long entry at $21.25.

The rebound came on news LGF and MGM had taken an equity position in Asian based Fifth Journey, a company founded by former executives from LucasArts, Universal Pictures and Gameloft. The company develops next-generation Hollywood games and interactive entertainment. The partnership and equity stake will allow LGF and MGM to break into the highly lucrative Asian gaming market with an eventual translation into Asian movies.

Original Trade Description: February 17th.

Lions Gate reported earnings on the 5th and dropped like a rock from $26 to $16 on ten times normal volume. Adjusted earnings of 45 cents missed estimates for 47 cents. Revenue of $670 million missed estimates for $767 million.

Lions Gate earnings are always lumpy. As a film maker with 2-3 major motion pictures a year the quarter with a big release always spikes and the quarters without a release crash. In the latest quarter the Hunger Games Mockingjay Part 2 had a huge audience but it was sandwiched between James Bond's Specter and the Martian. Those big films sucked up the available screens and pushed Mockingjay out of the headlines. Even with the competition the film grossed more than $650 million.

The studio has three movies for the first half of 2016 but none are expected to be blockbusters. Lions Gate also has a sizeable portfolio of TV shows like Orange is the New Black, Nashville, The Royals, The Wendy Williams Show and Casual, with more than 75 others across 40 networks. They have contracted future revenue from those shows of $1.3 billion at the end of December. They have a library of more than 16,000 motion picture and television titles.

One of the reasons the stock fell so sharply was the expectations for LGF to acquire a lot of other "free radicals" as John Malone calls them. Those are smaller studios that could help add to the LGF franchise. However, as a Canadian company they are prohibited from acquiring anyone bigger than themselves. When their market cap dropped from $7 billion to $3 billion after earnings it meant their potential acquisition candidates shrunk significantly. They were also rumored to be considering a merger with the Starz Network. That also played into the stock drop mix because owning their own TV network could present problems for selling their content to the other 40 networks they partner with. STRZA shares dropped from $31 to $20 on the earnings because it suggested there would be no merger.

Now that the smoke has cleared LGF shares are rising again. They closed just under $21 on Wednesday. They are heavily oversold and heavily shorted. The combination in a positive market could continue to push the shares higher.

The lumpy earnings will be forgotten and the stock will recover. It was trading at $41 back in November before the merger news appeared. If that is no longer an option we could see a swift rebound.

I am putting an entry trigger at $21.25, just over the $21.09 high for today. We will only enter the position on a continued move higher.

With a LGF trade at $21.25

Buy LGF shares, initial stop loss $17.85

Optional

Buy June $23 calls, currently $1.55, no initial stop loss.



SGI - Silicon Graphics Intl - Company Profile

Comments:

SGI recovered some of Tuesday's loss to post an 8 cent gain. The resistance at $6 is holding.

This position remains unopened until SGI trades at $6.05.

Original Trade Description: February 19th

Silicon Graphics is a leader in high performance supercomputing. They build server components that handle compute intensive, fast algorithm workloads, such as Computer Assisted Engineering (CAE), genome assembly and scientific simulations. For instance, the SGI UV-3000 scales from 4 to 256 CPU sockets, utilizing multiple CPU cores per socket and up to 64 terabytes of shared memory. UV-3000 Description That description may be jibberish to readers without a tech background. I started working in computers since 1967 and I can assure you this is thousands of times more powerful than the computers NASA used to send men to the moon and 1,000 times more powerful than your desktop computer today.

SGI surged last week after Hewlett Packard Enterprise (HPE) said they were going to utilize the SGI platform in their new HPE Integrity MC990 X Server. This is a large business server that supports heavy workloads. This strategic partnership with SGI will greatly extend the reach of SGI technology. It is also a confirmation of the stability and high performance of the SGI platform and could lead to additional acceptance by other manufacturers.

In late January, SGI reported adjusted earnings of 14 cents compared to estimates for 5 cents. Revenue of $152 million beat estimates for $145 million. However, shares plunged from $7.80 to $5.20 the next day after the company filed a shelf registration for $75 million in new shares. The company market cap is only $200 million.

Shares remained volatile around $5 until the 12th and the full impact of the Hewlett Packard partnership was understood. They closed at $5.85 on Friday and a four-week high.

I believe the worst is over and the shelf registration forgotten in light of the partnership news.

I am recommending we buy SGI shares with a trade at $6.05 and target $7.35 for an exit. That would be a 21% gain. I am not recommending an option on this position but they do exist. The June $6 call is 95 cents and the $7 call is 60 cents. If you buy the option, I would plan on holding it longer than the stock position and hope that shares move over resistance at $7.40.

Earnings are April 27th.

With SGI trade at $6.05

Buy SGI shares, stop loss $5.25



SWHC - Smith & Wesson - Company Description

Comments:

Smith moved back to resistance at $24 and I do expect a breakout soon.

Original Trade Description: January 21st.

Smith & Wesson is a gun manufacturer. Business has been very good but they announced this week they are looking for some acquisitions in other outdoor areas so their business is not so tied to the cycles in gun sales. Whenever an administration begins talking about more gun control measures their sales soar. When there are no politicians trying to ban guns we see sales decline.

The current administration has been the best for gun sales since the Clinton assault weapons ban. The FBI said the increase in the number of background checks for gun purchases has been so strong that their system is overloaded and they have had to halt appeals for denials until they can add some more personnel.

December saw a record of 3.3 million background checks, which was more than 500,000 above the prior record for December in 2012. On Black Friday alone there was a record 185,345 checks and a new single day record.

While this surge in gun sales has powered Smith & Wesson to record profits the company realizes that the election of a pro gun administration will slow those sales. For this reason S&W announced this week they were looking into getting into the $60 billion outdoor sporting goods market. They will likely be trying to acquire brands that they can add to their lineup that are not directly related to guns.

S&W said they were on the hunt for candidates but did not have any announcements at the current time.

This is a good move for S&W for obvious reasons. By branching out into other products, it will also help widen the S&W brand even if those new products have their own brand names.

Shares spiked to record highs over $26 when they reported earnings in early January. The post earnings depression appears to be over and shares dropped back to support at the 100-day average. This is a good spot for people to launch new long positions and once the current market weakness is over the small cap stocks like S&W with strong growth will be in demand.

Earnings March 8th.

Position 1/25/16:

Long SWHC shares @ $21.35, see portfolio graphic for stop loss.

Optional:

Long June $23 call @ $1.75, see portfolio graphic for stop loss.



USO - US Oil Fund ETF - ETF Description

Comments:

Still hovering around $8.50 until we get out of the inventory build period that lasts through march.

This is a long term position so be prepared to see lots of volatility before the final long-term rally begins.

Original Trade Description: January 27th

The USO ETF attempts to reflect the performance of West Texas Intermediate crude oil. The ETF invests in futures contracts for oil, diesel, heating oil, gasoline, natural gas and other fuels traded on the Nymex in an effort to track WTI and avoid futures roll over bleed.

Typically, a futures oriented ETF buys forward contracts. As those contracts expire, the funds are rolled over into the next series of futures contracts at higher prices. This causes a disconnect between the actual price of the underlying commodity.

The USO attempts to reduce that as much as possible by spreading the terms and types of futures contracts it holds.

If you are still reading this you are probably wondering why I am recommending a somewhat perishable ETF on oil when we all expect oil prices to go lower. Good question!

Yes, oil prices "should" go lower as inventories build over the next two months. However, the entire world of professional investors understands this but prices have spiked twice in the last week on rumors of a Russian - OPEC agreement to cut production. If such an agreement was actually reached, we could see prices back over $50 very quickly.

I am proposing we try to buy the USO on the next dip on the chance that an agreement will eventually be reached. Last week it traded down to $7.92. When oil was $38 in December the USO was $11. If we can buy it in the $8.50 range we could see a 30% gain on any deal announcement and even more once oil prices reacted to the change in production dynamics.

Obviously, we cannot predict that a deal will happen. Saudi Arabia and Russia are enemies. However, they both have the same problem and that is they are hemorrhaging cash. In July 2014 when oil prices were $105, Saudi Arabia was taking in about $1.06 billion a day in revenue. Today at $30, they are receiving $303 million. That is a loss of $757 million a day, every day, and the kingdom is suffering from it. Russia is losing about $650 million a day. They both have millions of reasons to put their differences aside and reach an agreement.

While we cannot guarantee this will happen the headline chatter is growing daily. They may not be ready to call a truce just yet but together they are losing more than $1.4 billion a day. That is a huge incentive to do something. The next regular OPEC production meeting is early June. I am recommending we buy the USO on the next dip and hold it until July. I cannot imagine OPEC continuing the madness past the June meeting and they are likely to hold an emergency meeting earlier if crude drops back into the $20s again.

Typically, prices rise when inventories begin to decline in late April as refiners ramp up production for the summer driving season. Even if Russia and OPEC do not reach an agreement, we should see a rise in prices starting in May or earlier.

I am not going to try to buy the bottom because we may not see it again. I am recommending we buy the USO at $8.50 and hold it with no stop loss because it could go lower. I believe we will be rewarded over the next few months and with the right set of circumstances, we could be very well rewarded.

2/1/16: Position entered with a USO trade at $9.00:

Long USO shares @ $9.00, no stop loss.

Optional:

Long USO July $10.00 calls @ $.85. No stop loss.




BEARISH Play Updates


BG - Bunge Limited - Company Profile

Comments:

Decline is testing support at $48.75. No change in the position.

The long put is still open with a stop loss at $51.85.

Original Trade Description: February 18th

Bunge is an agricultural business and food company. They sell food, commodities and fertilizer on a global basis to more than 40 countries. Last week they reported earnings on February 11th and they were not good. Earnings came in at $1.49 compared to estimates for $1.56. Revenue of $11.1 billion missed estimates for $11.6 billion and that was well below the year ago quarter at $13.2 billion.

The company guided lower saying the strong dollar was weighing on revenues and declining economic conditions in countries like Brazil are limiting the available funds to import food. Pricing power is falling as commodity prices continue to decline worldwide.

Adding to Bunge's problems was a cargo of French wheat that was rejected by Egypt because of what they claimed was excessive levels of the ergot fungus. The generally accepted level for fungus is 0.05% and apparently, Egypt decided the content was higher than the standard. Since it is impossible to halt the naturally occurring fungus entirely, it exists in every load. Egypt made the unusual statement that they would have "zero-tolerance" for fungus in the future. If Egypt can get away with that qualification then other countries could try to change their rules as well. Bunge is suing Egypt and the cargo of wheat is still parked off the Egyptian port of Damietta. Egypt subsidizes bread for its population of 88 million.

Reportedly Bunge is trying to resell the wheat but it may be difficult since the rejection has tainted the cargo. The decision by Egypt for zero-tolerance has pressured the prices for wheat to $179 per ton and a five-year low. This hurts future sales by Bunge to any other country.

To recap, Bunge missed on earnings and revenue, guided lower for 2016 and has seen future commodity sales threatened by the Egyptian move and the falling prices of their various commodities.

Shares fell sharply after earnings from $58 to $46. An instant rebound appeared to $53 but that is now fading as the bad news sinks in and the outlook for Bunge's earnings dims even further. I believe that we could see the stock price return to those lows from last week, if not lower. Shares had already been declining since last June.

With a BG trade at $49.75

Stopped 2/22/16: Short BG shares @ $49.75, exit $51.25, -1.50 loss.

Optional:

Still open:
Long April $47.50 put @ $1.80, stop loss $51.85



VXX - VIX Futures ETF ETF - ETF Description

Comments:

The opening dip in the S&P spiked the VXX to $26.65 but it closed in the afterhours session at $24.73 and nearly $2 lower. We need a couple more days of a positive market to push it to two-month lows.

Original Trade Description: August 24, 2015

The U.S. stock market's sell-off has been extreme. Most of the major indices have collapsed into correction territory (-10% from their highs). The volatile moves in the market have investors panicking for protection. This drives up demand for put options and this fuels a rally in the CBOE volatility index (the VIX).

You can see on a long-term weekly chart that the VIX spiked up to levels not seen since the 2008 bear market during the financial crisis. Moves like this do not happen very often. The VIX rarely stays this high very long.

How do we trade the VIX? One way is the VXX, which is an ETN but trades like a stock.

Here is an explanation from the product website:

The iPath® S&P 500 VIX Short-Term Futures® ETNs (the "ETNs") are designed to provide exposure to the S&P 500 VIX Short-Term FuturesTM Index Total Return (the "Index"). The ETNs are riskier than ordinary unsecured debt securities and have no principal protection. The ETNs are unsecured debt obligations of the issuer, Barclays Bank PLC, and are not, either directly or indirectly, an obligation of or guaranteed by any third party. Any payment to be made on the ETNs, including any payment at maturity or upon redemption, depends on the ability of Barclays Bank PLC to satisfy its obligations as they come due. An investment in the ETNs involves significant risks, including possible loss of principal and may not be suitable for all investors.

The Index is designed to provide access to equity market volatility through CBOE Volatility Index® (the "VIX Index") futures. The Index offers exposure to a daily rolling long position in the first and second month VIX futures contracts and reflects market participants' views of the future direction of the VIX index at the time of expiration of the VIX futures contracts comprising the Index. Owning the ETNs is not the same as owning interests in the index components included in the Index or a security directly linked to the performance of the Index.

I encourage readers to check out a long-term chart of the VXX. This thing has been a consistent loser. One market pundit said the VXX is where money goes to die - if you're buying it. We do not want to buy it. We want to short it. Shorting rallies seems to be a winning strategy on the VXX with a constant trend of lower highs.

Today the VXX spiked up to four-month highs near $28.00 before fading. We are suggesting bearish positions at the opening bell tomorrow. The market volatility is probably not done yet so we are not listing a stop loss yet.

Position 8/25/15:
Short VXX @ $21.82, no stop loss.

Second Position 9/2/15:

Short VXX @ $29.01, no stop loss.

Trade History
11/07/15 adjust exit target to $16.65
11/02/15 adjust exit target to $16.50
10/19/15 add an exit target at $16.25
10/15/15 planned exit for the October puts
10/14/15 if you own the options, prepare to exit tomorrow at the close
09/02/15 2nd position begins. VXX gapped down at $29.01
09/01/15 Double down on this trade with the VXX's spike to 6-month highs
08/25/15 trade begins. VXX gaps down at $21.82





If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.

subscribe now